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CARBON MARKETS

The Kyoto Protocol, adopted in 1997, established the foundation for the development of a carbon market with the goal of limiting and reducing GHG emissions of industrialized countries and economies in accordance with agreed targets by each member. The Kyoto Protocol laid the groundwork for Carbon Markets by establishing market-based mechanisms.

 COMPULSORY CARBON MARKET (CCM) 

Traded and regulated by mandatory national, regional or international regimes

Today

VOLUNTARY CARBON MARKET (VCM)

Traded by companies and individuals on a voluntary basis to achieve carbon compensation¹ and neutralization²

Source: Mckinsey, Putting carbon markets to
work on the path to net zero

CARBON MARKETS CAN BE DIVIDED INTO TWO SEGMENTS:
COMPULSORY CARBON MARKET (CCM) AND VOLUNTARY CARBON MARKET (VCM)

Compliance (Compulsory – Cap and Trade/ ETS) Markets (CCM)

  • Typically, cap-and-trade emission trading system (ETS) exists, with a cap on the amount of GHG that a corporation can emit.

  • Companies from high-polluting industries such as energy, steel, and cement are participating in cap-and-trade schemes.

  • The EU Emissions Trading Scheme (EU ETS) is the largest, with a market worth $300 billion*. 

  • A carbon allowance is a traded asset, with futures and options available on it. 

  • A polluter who buys these credits buys the right to pollute (allowance), not the right to save CO2.  

  • A total of 30 carbon markets are in force.

  • A Quarter of global emissions are covered by CO2 price (Bloomberg Nef 2021)

ETS WORLD WIDE.PNG

EMISSION TRADING SYSTEMS (ETS) GLOBAL PRICES

icap-graph.png

Source: ICAP https://icapcarbonaction.com/en/ets-map *As of 2021

Voluntary Carbon Markets (VCM)

  • Markets are built on the goodwill of individuals and businesses. Allows businesses and individuals to purchase carbon offsets on a voluntary basis with no intention of using them for compliance purposes. 

  • When one carbon offset is purchased, it supports a project that has already saved one ton of CO2. Various registries track voluntary offset projects and grant offset credits for each verified and certified unit of emission reduction or elimination.

  • VCMs are expected to experience significant growth with the potential to reach a market value of US$5B -US$30B in 2030 (McKinsey & Company 2021)

devcm.PNG

Projections are indicative and do not guarantee and it does not imply that a profit will be achieved in the trading program in the future

External reports and insights on Carbon Markets

Introduction to Emission Trading Schemes 
The International Carbon Action Partnership (ICAP)

Putting carbon markets to work on the path to net-zero, McKinsey Sustainability, October 2021 
https://www.mckinsey.com/business-functions/sustainability/our-insights/putting-carbon-markets-to-work-on-the-path-to-net-zero

Europe carbon prices expected to rise to 2030 Industry survey, Reuters, June 2021
 https://www.reuters.com/business/sustainable-business/europe-carbon-prices-expected-rise-2030-industry-survey-2021-06-14/

The Road to Net-Zero is Paved with Good Intentions – Can Carbon Taxes Reduce Emissions?, Arabesque, September 2021
https://www.arabesque.com/2021/09/29/the-road-to-net-zero-is-paved-with-good-intentions-can-carbon-taxes-reduce-emissions/

A blueprint for scaling voluntary carbon markets to meet the climate challenge
https://www.mckinsey.com/business-functions/sustainability/our-insights/a-blueprint-for-scaling-voluntary-carbon-markets-to-meet-the-climate-challenge 
 

1. Compensation measures include supporting the avoidance of further emissions (e.g., preserving natural carbon sinks such as forests), and helping others
reduce emissions via new technologies that are less carbon intense.
2. Neutralisation measures remove CO2e from the atmosphere via nature-based (e.g.,reforestation) and technology-based (e.g., direct air capture) sequestration.

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